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Get Clients to Pay On Time - the 4 steps
4 Steps To Make Sure Your Clients Pay On Time
We all understand that not collecting payments on time has as a severe impact on your cash flow, but let’s not forget also that you are effectively giving your clients, your debtors, interest-free credit, and this also has an impact on your cash flow and your profit.
Whatever the size of your business – start-up, sole trader, micro business, small business or SME – the remedies are the same. Follow these four steps and you will reduce the amount of money owed to you:
Ø Send out the invoice as soon as you ship the goods;
Ø Call the client the day after you send out the invoice to check the invoice has been received and there are no issues with the goods or services supplied;
Ø Call the client 5 days later to carry out the same checks, so that there no excuses on that front;
Ø Call the client 5 days before you expect to get paid to make sure your invoice has gone into that month’s payment run.
Pretty obvious really, but it is surprising how many companies are not doing that.
DSO – Days Sales Outstanding
Also known as debtor days, this is the average number of days your clients take to pay their invoices. Let’s take a business that has a turnover of £1,000 per day, typical of many small businesses with a couple of employees. If its clients owe them £75,000 then their DSO is 75 days – 75 days at £1,000 per day – that is what it means. So the DSO for your business is just the total debt owed to you divided by your average daily sales.
What does DSO tell us?
Well, the £1,000 a day turnover company traded on 30 days terms so it could reasonably expect to get paid in 45 days – the end of the month following the month of the invoice – and it should have debtors of £45,000.
Just imagine the impact on cash flow of reducing the DSO to 45 days – a £30,000 improvement. Even a 10 day reduction in DSO would improve cash flow by £10,000 – certainly worth going for.
Effect on overdraft
One factor that is often ignored is that companies may find they have to borrow to fund the excess credit they give to their customers. Our sample company could have an overdraft of £30,000 – essentially funding the gap between 45 days and 75 days DSO. The cost to them of funding that gap at an interest rate of 12% would be an additional £3,600 in bank interest, not counting the bank charges that go with it. That is an extra £3,600 cost to their
business for giving their clients excess credit on interest-free terms – reducing net profit – madness really. You could save the cost of bank interest and increase your profit by improving your DSO and reducing your borrowing.
Invoice on time
Strictly speaking DSO does not include your delay in sending out your invoices, but the impact is the same and the easiest way to eliminate that is to send the invoice out as soon as you have shipped the goods or supplied the service.
Manage your clients’ payment expectations
Contacting the client at least three times between invoicing and collecting the money:
Ø the day after you send out the invoice to check the invoice has been received and there are no issues with the goods or services supplied;
Ø 5 days later to carry out the same checks, so that there no excuses on that front; and
Ø 5 days before you expect to get paid to make sure your invoice has gone into that month’s payment run
That way your customers will get to know when you expect to get paid. They will often delay paying their suppliers where they can get away with it to improve their own cash flow, but if you chase them – nicely – they will get to know you expect to be paid on time and they should pay you quicker than other suppliers.
So now go and build your relationship with your customer and improve your cash flow immediately.
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by Colin Thompson ISBN: 978-1-84549-289-2
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Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Print Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives and Non-Executive Director, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM's/Software and over 400 articles published on business and educational subjects worldwide. International Speaker and Visiting University Professor.
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